Transcript: Starting a Company in a Down Economy
The following is a transcript of the conversation with Jesse Devitte that aired on January
Chip Griffin: My guest today
is Jesse Devitte. He’s a venture capitalist with Borealis Ventures here
in New Hampshire, and one of the smarter guys I know in the field of
picking good technology companies. Welcome to the show, Jesse.
Thanks, Chip. Great to be with you.
Chip: The current economic
environment is obviously very challenging. On the one hand, you have
people saying access to capital is more difficult. On the other hand,
you have people saying the best time to do a startup is in a down
economy. What say you?
Jesse: I say both. I think
they are definitely both the case. It’s interesting when you combine
those thoughts. I’ll admit, it was pretty scary last October and
November. It almost felt like the oil came out of an automotive engine
and it almost seized up. Maybe that’s a bad analogy to use.
But it was really interesting. I think at this point in time, early in
the year, there’s some uncertainty washed away. There’s some excitement
of a new administration and so forth. So people are sort of looking
ahead. I don’t know that people have a lot better view of 2009;
certainly very few could have predicted how 2008 wrapped up. And I
don’t think people have a better idea how 2009 will come out. But I
think people feel that the most uncertain time is sort of behind us,
which is really good.
far as venture capital, I think we’re fortunate at Borealis in the
sense that we’re probably more traditional company builders than we are
traditional venture capitalists, if you will. I think actually having a
capital plan is more important than ever for entrepreneurs of all
sizes. In fact, I think some are learning that painful lesson right now.
old adage that you need to make sure you have the money when you don’t
need it versus it’s a lot harder to get it when you do need it.
some people are learning that lesson right now. We’re pretty fortunate
in the sense that we’ve worked hard with our young companies. We get in
there very early from seeding and the first investor, all the way
through the growth stage. We’re fortunate in the sense we really work
with them in a focused way in making sure they have a capital plan and
they have a broader syndicate of investors versus just us.
means that we have ideas about how to access lines of credit that
already put in place. We have different financing strategies, even
customer financing strategies. All of those things are part of a
broader capital plan. I think this is a wake-up call for entrepreneurs
to realize that you really need to have it in place so that when you
face times like this, you’ll be ready to go.
I think this is kind
of a “back to the future” environment; it’s back to basics. It’s a real
wake-up call and a reminder that business is pretty straightforward in
terms of how it works. Strong, passionate people with an idea or the
delivery of great product or service, but one that really delivers
something to the customers.
So I think that the other thing
beyond making sure our companies have a capital plan is making sure
that their products, more than ever, are tested in this environment.
They need to deliver products and services that deliver return on
investment for their customer base quicker than ever before, because
those customers, they have almost [inaudible 03:23] in making decisions
about giving them money for products and services or employing people.
And that’s a tough environment for your customers to be in.
think the premium on ROI is more than ever – it’s higher than it’s ever
been before. So companies that have those kind of viewpoints, I think,
are much better positioned.
Chip: You mentioned that at
Borealis you have sort of a different approach. You said “company
builders” as opposed to typical investors. Explain to my listeners a
little bit what you mean by that.
Jesse: First of all, in my own
case and the rest of the firm, we’re really former entrepreneurs who
have become venture capitalists, versus finance people who have become
venture capitalists, if you will. So we’re entrepreneurs first and
foremost, therefore we have more of a bootstrap mentality, which I
think has a higher value right now.
So we don’t work to solve issues with capital and money all the time,
we always think about how can you alter your strategy, how can you
manage your costs better, how can you reach a broader customer base,
how can you get more value for your product or service We think about
that first before we think about putting capital to work. We’re very
focused on capital efficiency.
of the things that’s happened in the last decade was that there was a
tremendous amount of success in terms of venture firms building out
technology-based companies. And their venture firms became large and, I
think, successful – depending on how you look at them.
of their risk is that they have to put a certain amount of money to
work. We’re really a small-focus firm, focused on sectors, really
early-stage companies. So we don’t have any pressure to put money from
our investors to work. We can put it work in a very capital-efficient
way, which really works our well right now.
So we’re focused on
the bottom line, we’re focused on delivering high-quality value in
services and working with entrepreneurs to do that. So I think that
works out well for us, versus some that are, let’s say, taking more of
the longer-term bet strategy, if you will. We’re focused on making sure
that companies do well today.
Chip: Looking at the current
environment, are there certain sectors or types of companies that you
think are more likely to be successful going forward?
Jesse: Certainly there are
some sectors hit harder than others. It goes without saying that
financial services and people selling to traditional corporate
enterprises are probably the most challenged areas right now.
For example, we have a company, Envista Software in Beverly,
Massachusetts, that’s customer target base is utilities and
municipalities. What’s so ironic about that is last year when we were
talking to other investors about joining us in supporting this company,
they couldn’t imagine investing in a company that sold to the public
guess what? Infrastructure’s looking pretty good right now. Who could
have ever foreseen that? So sectors do look better over time, some
better than others. And that looks a lot better than financial services
these days, for example.
So it’s different sector by sector,
there’s no question about it. I think we’re fortunate to have
investment in some of the sectors that are looking pretty good right
now, like that one. We have a couple of companies that are in the
construction space. We have a company that formed in Manchester, New
Hampshire, whose main customers are architects.
And there’s a
measure of industry activity called the Architectural Billings Index,
which is the lowest it’s been since they’ve been keeping for the last
10 or 15 years. That’s as low as it’s been, but the company has just
had its two best quarters ever. And the key there is that the company
developed its product two years ago, and the product delivers really
short-term return on investment.
And so you’ve really got to have
these companies in the right position. I think that’s why, for instance
other people talk about if this is the right time to start a business –
we were fortunate to start a number of our businesses in the 2002-2203
time frame, which actually was a pretty tough time.
raising the first version of Borealis Ventures the first funding, and
some people told us we were crazy to be doing that. It turns out
there’s a reason why venture capital firms are organized and rated by
our vintage in some ways. Because the timing really does make a
Starting companies during a difficult time generally
means better companies going forward, because you have this ultimate
market test by customers, only the strong get in the game. All those
things kind of combine and you get a really value to investors. All of
those things combine to make this a really good time for a true
early-stage investor. Probably less certain for these later-stage or
That’s a more difficult sector to be in. That’s
where there’s more venture capital activity than there is in the
Chip: How do you find the
investments that you do? Is it sort of the typical thing that you hear
of, the investors sending you business plans? Or do you really kind of
go out and find the entrepreneurs that you want to invest in more so?
Jesse: I think we are more on
the latter, really focused on the entrepreneurs versus business plans
that come across the transom. I don’t recommend to entrepreneurs that
they send any venture capitalists business plans across the transom or
in the email box. I don’t think that’s a good idea.
That’s generally not a great way to start a relationship, and quite
frankly we don’t believe in the business plans people send us anyway.
We’re more interested in the people and their ideas and we develop our
own view of their business plan. It’s good that they have it because it
helps them think through the business and it’s a great process to go
through as an entrepreneur, but it’s not the key to getting financed.
think the key is having the passion and credibility and a relationship
with some investors that can believe in you. So we’re looking for
people that we can believe in and we can develop a shared vision with,
and that we can launch down the path with together when it comes to
building a company for the future. That’s our focus.
So we’re out
looking of the people. We do think about ideas sometimes, and we go out
and look for the people who might have those ideas. So we look at it
from two ways. We kind of think that there are some areas and sectors
we’re invested in, Matt Rightmire in the Internet engaging of media
space, and myself in the technical application software space.
have some preconceived ideas about where there are opportunities. We’ll
use that for context to go out and look for entrepreneurs who have
ideas and maybe very early businesses underway in those spaces. In
other cases, individuals meet the entrepreneurs and listen to their
It kind of come from both directions, but we’re more focused on the entrepreneur and the ideas.
Chip: Speaking of being
focused on the entrepreneurs, I know that you are also involved in
promoting entrepreneurship, particularly here in the New England
region. Why don’t you talk for a minute about the program that you’re
working with UNH on?
Jesse: We have something –
we’re in our third edition of the course, the third time we’ve done it
– sponsored by the “New York Times” and the University of New
Hampshire. We have a Discovery course underway on the Durham campus of
the University of New Hampshire. It’s not a business course, it’s a
course on entrepreneurship titled “The Meaning of Entrepreneurship,”
led by Professor Ross Gitell, who does a lot of economic work around
the new economy and technology here in the New England area.
Ross and I and several others have partnered up – the New Hampshire
High-Tech Council as well – have partnered up to recruit entrepreneurs
as mentors to young students. Each class has had about 20 students in
it. We go out and recruit an entrepreneur to have a one-to-one match so
that that entrepreneur in some way can help a younger version of
really our pitch. And our goal is to identify out of each class the
next generation of entrepreneurs, to enable the entrepreneurial gene
that is sometimes inside of these young kids and get them on the path
towards entrepreneurship. That’s both social entrepreneurship as well
as business entrepreneurship. It’s about innovation and change and
making a difference toward seeing and innovating.
That’s the goal
of the course. As I said, we’ve done 40 or 50 students now, and I can
just tell from the email traffic that flowed from the first two classes
that we have identified some entrepreneurs of the future. There’s no
question about it. We’ve given them a little bit of inspiration and
confidence around how to pursue some of their ideas, and that’s the
It’s exciting, it’s a long-term project. Hopefully in
the next few years we’ll have it to scale enough that it can spread
across a variety of university systems and campuses here in New
Hampshire. But right now running it on one while we sort of fine-tune
how we approach this.
Chip: That’s young
entrepreneurs. One of the things you often see in a down economy is
when people get laid off they decide to start a company as a way to
resurrect their own financial fortunes. Do you see differences in the
success of young entrepreneurs, perhaps fresh out of colleges, versus
those who may be more mid-career changers?
Jesse: I think it’s not a
difference in terms of good or better or quality, but there’s
definitely difference between the two. The advantage, of course, of the
entrepreneur who gets the proverbial market push or market shove, if
you will, where they either see the opportunity to exit their company
because their prospects aren’t good or in fact they get the actual pink
slip – that process that some people call “creative destruction” that
we’ve seen here in the New England area from the original computer
companies and so forth.
Along the way, a lot of companies have been spun off as a result of
some of those dynamics. I think what’s great about those entrepreneurs
– I guess you called them the mid-career entrepreneurs – is that
they’ve already experienced some things like failure and challenges in
their careers first-hand. And that’s one of the more valuable lessons
that I see the more experienced entrepreneurs share with the young
students who want to be the next generation of entrepreneurs, is the
lessons learned from failure.
saw a someone recently quote it as an “under-rated exercise” in terms
of its value back to those who experience it. And the essence of
entrepreneurship, of course, is trying things. When you have that kind
of an approach towards risk, you’re going to try some things and
they’re not all going to work out.
The great thing about the
mid-career entrepreneurs is they’ve already tried a few things along
the way in their career professionally, so they’re well-equipped. I
worked with one last year who left a company when a couple larger
companies he was part of merged. He’s been a corporate marketing type
person for a company for over 20-25 years, and this was his chance.
kids were just entering college and he had the funding in place to
complete it, and this was his window, if you will, that was inspired by
his life situation, but initially by his employer who was cutting back.
So he saw the opportunity.
One year later, he’d had a very
interesting year. In some ways he would never have picked last year,
but he’s glad that it happened that way. He’s actually got his own
business now, he’s bootstrapped it, and he’s got a profitable small
business that now he can look at figuring out how to grow and be a more
substantial business over time.
I think there’s benefits to both
approaches. But right now, I think it’s healthy for the market to have
an influx of entrepreneurs who are sort in a mid-career.
Chip: You mentioned failure,
and I think that’s an often overlooked point. Most people are fairly
reluctant to talk about failure, right? But don’t you learn more out of
failure than you learn out of success?
Jesse: There’s no question
about it. In fact, one of the interesting things about this market
today, one of the silver linings of the tough general economy that
we’re facing today is that the market is the ultimate tester today.
What are the failures that you’ve experienced over time that you could
avoid if you’d had better insight as to whether or not your product is
accepted by the marketplace.
Sometime you go out and you don’t know, as they say, until you put the
dog food out whether the dog takes it or not. You don’t know until you
get to that point. One of the great things about this market that can
kind of give you an advantage ahead of some of the failure you might
have to experience otherwise, is the market is going to test you right
now, the ultimate filter.
know instantly whether you’ve built something that meets the needs of
the market. You don’t need to get it out there and try it out over a
year or two, which is a difficult exercise. You know pretty quick,
right away. There’s not a lot of capital wasted on launching products
right now. They kind of have to launch themselves, which is the
conservative nature of capital investment right now. So there’s some
advantages that you can actually use this environment to avoid other
mistakes you might have to experience.
But failure might be
global expansion, it might be how you figure out how to do pricing, it
might be how you hire or build out your team. Simple things like the
titles you give people. All those are small, but sometimes really big
lessons you learn in building a business that are highly under-rated in
terms of their payback over time.
You don’t know it until you do
it, so I think it’s always instructive to learn from entrepreneurs
who’ve been down the path a few times. This is one of the most common
discussions that we have with them.
Chip: You’ve mentioned
challenges and opportunities in the current economic environment. I
imagine the same is true for the geographic region in which you
operate. I know you have investments outside of northern New England,
but you’re based in northern New England. For tech companies in the
northern New England area or other non-traditional high-tech places, is
that more of a challenge, more of an opportunity, or a little of both?
Jesse: I think it’s a little
of both, but I think it’s in the “glass half full” category versus
half-empty. I think there’s sort of a Yankee tradition of building
stuff ourselves. I remember when we were starting our company, a group
of us called [inaudible 16:19], and people were amazed when they came
in our conference room that we had this great big table in it.
And the reason that we had this great big table in our conference room
was that we actually just built our conference room table. We got a
bunch of wood and built it. We didn’t go out and buy it. It never
occurred to us to go buy a big conference table, we just built a big
one. I think that’s an example of kind of the Yankee way of thinking
that pays off right now, because you’ve got to do more on your own and
more hands-on and more basics to actually be successful right now. I
think that environment in New Hampshire and in other New England areas,
stands pretty well. I think that the more high-powered deal, the coast,
if you will – particularly the West Coast and this idea or PR-fueling
the startup of a lot of these companies and interest, those are more
risky strategies than ever before right now.
I think this is an
environment that rewards the real, true, ground-up, bootstrapped
company builders. So I think us Yankees do pretty well in that
Chip: I guess I’d close out on
this question. If someone’s listening to this and is inspired to start
their own company, what are the key pieces of advice that you’d give
Jesse: I would give them two
pieces of advice. First of all I would say, at a high level, when you
watch CNBC, turn off “Squawk Box” but watch “Donny Deustch and the Big
Idea.” [laughs] That’ sort of a joke, but a half-joke. I mean that.
It’s easy to be overwhelmed by the broad economic environment on a
daily basis and watching the Dow. If you want your company to succeed
based on where the Dow is going, that’s not going to work for you, and
won’t return anyway. So I think you need to have that right
I think the other real advice I would give them is two pieces, one on
the customer-facing piece of it. Work hard to co-create the solution,
your product or your service, with your customers. Think of them as a
financing alternative, as a financing strategy. You have to work with
them more closely than ever before, and I think you’ll be rewarded for
think about co-creating. We’ve got a couple of companies that have used
that process that is based upon a methodology of co-creating software
solutions with the customers they intend to serve. I think that’s the
environment that we’re in right now.
I think the other side of
this, on your internal company view of things, I would just say be real
careful on investments in building out your company. Not just your
hiring, but the type of infrastructure you put in place in your company
too, right? Which is more about using virtual services and so forth.
You can see I have an entrepreneur calling me right now. [laughs] Probably just heard this on the radio show, Chip.
But anyway, that’s my advice. Be careful in the company side as well.
Chip: I think your co-creating
point is a great one. If you take a look, Michael Bloomberg built a
multi-billion dollar company out of something that he co-created with
his first customer. In fact, when they first bought into it, he didn’t
even have a working product, he just a computer that would turn on. So
I think you’re absolutely right that that’s a great way to get started
and allows you to stay away from vulture capitalists like you, right,
No, no, no. Not like us, but like others.
Jesse: Let me clarify that. We
were really happy to talk to you earlier because, remember, we shared
that idea. So we like that approach.
OK, so it’s the others that are vulture capitalists. You’re the good guys.
Right. I like that. We have the white hats on. We’re ready to help.
Chip: Excellent. I appreciate
Jesse Devitte joining us today. He’s with Borealis Ventures, based in
New Hampshire. Thank you for joining us.
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